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Value trading

In this blog we will discuss the pros of using the method of value trading as opposed to traditional technical analysis techniques. I would love to explain exactly how it works but it would be too long to explain in words, if you want me to explain it fully let the team know and we can organise something where I explain it all.


Disclaimer: Please note that the opinions expressed by the author in this article do not constitute financial advice and are solely for educational purposes only. When buying shares, the value of your investment may go down as well as up and you may get back less than you invest.


What is "Value Trading"?

Okay so what exactly is “Value Trading” and what does it mean? By value trading I mean finding areas in the market deemed to hold value on all different timeframes: daily, weekly, monthly and even yearly. These value areas in the market are no ordinary support or resistance lines found on a spot market chart. The value areas mentioned are determined by looking at the amount of transactions that happen at each individual price point and from there noticing any similarities within the transactions over multiple days, and then basing trades from proven areas.

Okay so for you to get started and understand how to trade with value in mind firstly you will have to change one crucial thing in the way you currently trade, and that is to switch over to futures exchanges. Using the spot market leaves you completely clueless of any transactions that take place at any price point yet the futures exchanges are legally binded to release every transaction that has taken place, buying or selling, to every participant who is looking. Using the futures market over the spot market can give you an edge into finding real levels of supply and demand to key off and ultimately take your trading to the next level. Having access to the data that is the causing the price of the market to fluctuate allows you to make decisions based on numbers- if that’s your sort of thing.


Determining "Value"

There are multiple different tools that can be used to determine value in a market, in this blog I will be covering one fundamental theory which is key to understanding how the financial market works and how you can profit from it.


The theory is called Auction Market Theory and this is the basis of how I trade today. Put simply this theory is how all markets test the extremes of a certain range of prices to seek value, and if there is not any the price will drop back down to where value has been established before. For example, take a chocolate bar from any store. The prices all over the country are completely different, due to the store recording transactions and, based on the amount of transactions that happen at each price point, the price will be varied according to the supply and demand dynamics for that specific product. Auction market theory brings statistics and supply and demand into one idea and is crucial in the financial markets. For example, if we take that chocolate bar and look at the price of it over a year on Amazon you can see the price movements resemble the same type of chart as any financial market chart.


Based off of this data, if we took into consideration the amount of transactions at each price point, which is plotted by a bar chart below, we get a good determination as to where the company perceives “Fair Value” to be – where buyers and sellers agree with price and trading takes place.

It is key that you understand that the only difference between Amazon selling their chocolate bars at different prices and the financial market moving every second is that the financial market is a two-way market. By this it is meant buying and selling can happen at any price point, while Amazon is a one-way market as they are only selling their products. Using this fundamental concept, we can begin to determine major value zones over different price points.


Obviously, the bar chart above is rough but if you look at any price over a certain period of time they all form this ‘bell shaped’ curve. To then go further to determine any outliers in this specific time or price zone we can consider the fact that seventy per cent of all the data points are within one standard deviation away from the mean- which is referred to as the Volume point of control. Using this key law in statistics for bell shaped curves we can calculate the standard deviation of the pair, marking this on our chart and allowing these zones to be used to key off of. Luckily our futures exchange does this for us! In theory if the price exits the standard deviation zone during a balanced market we can say that there is an almost seventy per cent likelihood that price will return back to the zone with “fair value”. This is one key concept in “value trading”, and combines with the multiple other factors that help determine the market condition (balanced or imbalanced).


Concluding thoughts

To conclude I just wanted to clarify there is no single way to make money in the financial markets, my bias towards value trading is by no means me slandering the use of technical analysis in spot markets. Trading one specific way might work for one person but then it could not prove fruitful for another. After years of experience with both, I have concluded that the use and consideration of transactions at each specific price point to calculate my zones provides a better edge than just looking at the price itself. The cause of price movement in markets is the buying and selling dynamics (transactions). The effect is the movement of the price, and by using the data provided in a futures market you can base your trades on the cause of market movement, rather than basing your trades on the effect of the market (which is the case when only using standard price charts).


If you have any questions please get in contact!

Jhw160@student.bham.ac.uk